Aggressive bidding for coal blocks is likely to cost power companies dear

As the auctioning of coal blocks comes to a close, its success is being counted through Rs 2.05 lakh crore it would bring to state governments in cash over the life of the mines, besides some Rs 96,971 crore benefit it will bring in the form of cut in power tariffs. But for power companies that have bagged the blocks on a pledge of charging less than nothing for coal while calculating power tariffs, the next few years could be troublesome.

A question, however, emerges if the mines that went through aggressive bidding were auctioned at best possible tariffs then why are the power rates coming down since coal should cost more to the bidders. This is because since the coal blocks earmarked for the power sector were put on reverse auction where bidder, quoting the lowest, below the reserve price, gets the block. This translates into lower power rates due to fuel price coming down. So, there is Jindal Power, which quoted a negative Rs 108 for Gare Palma IV 2&3, allotment for which has been put on hold for the time being, giving away Rs 11,469 crore in lower power tariff over 30 years of mining lease. Though Jaiprakash Power quoted the lowest among power companies at a negative Rs 712 for Amelia North block, according to initial estimates, the concessions it would give in power tariff would be Rs 8,784 crore since the coal reserves here are lower than Gare Palma IV 2&3.

Owing to stiff competition, the reserve price which was to act as a ceiling was fixed as zero by the government. For every Rs 100 fall in bid amount, power tariff falls by six paise.

According to Salil Garg, director, corporates, India Ratings, the balance sheet for power companies, which bagged the blocks, could turn negative in the short term since they would have to incur additional debt. "The profitability, however, will improve because of better availability of coal and plant load factors. Earlier, they were in losses due to no coal or import of expensive coal but now the losses will get minimised," he said.

Garg, however, added the return on equity for these companies would come down though it might not be negative since some of these plants were non-operational due to lack of coal supply. "Companies would be able to recover their fixed cost. And, since they have offered to bring down rates, the fuel cost component in tariffs charged to distribution companies would come down."

This would mean keeping the fuel cost or the cost of mining to the minimal. Garg said the power companies would not make supernormal profits but whether such aggressive bidding would turn the projects unviable would be known only two to three years down the line. "They would have to use better technology for mining. Besides, since the bidding parameters allow sale of 15 per cent power on merchant basis, some cost could be recovered through such sales."

An industry insider pointed out the case of Talabira-I coal mine where the lowest initial price offer was zero. Five bidders - Adani, GMR, OPG, Sesa Sterlite, and Essar took part in the bidding. GMR Chhattisgarh Energy bagged the mine at a negative bid of Rs 478. "The typical mining cost for such a mine should have been around Rs 450 a tonne, which means the bidders have taken a very aggressive call discounting the mining fee by making money elsewhere such as coal sizing/handling costs, washing costs, selling of rejects/middling in open market, port charges, transportation/shipping costs etc. in their landed price of coal to their power plant," said the person who did not want to be quoted.

Interestingly, rate concessions would be possible only in cases where blocks were given out on auction. As the blocks allotted to government-owned companies did not go through auctioning and were given out on technical capabilities, there will not be any rate cuts but any gains would be factored internally in pricing. There were 42 coal blocks out of 43 allotted to government companies that had power generation as their end use.

Officials in the government said they had no reason to question the wisdom of bidders. "Companies would have made their calculations and kept their eyes open," said a senior coal ministry official, while dismissing a suggestion that aggressive bidding could raise issues of viability in the future. He argued that unlike earlier dispensation where captive coal block allottees were found to be squatting and not developing mines, this time the bidding criterion that companies should have made 80 per cent investment in end use projects would ensure that the intention of winner bidder was not to grab mines and sit over them but to develop them for an assured supply of coal.

A coal ministry official said there was opportunity cost in the auctioning and for non-power companies the cost of coal from the mines would still be lower than imported coal. "International coal prices may not be very high right now but there is a bit of unpredictability about it," he said.

For the unregulated sectors of steel, cement and captive power plants, the highest bid came for Gare Palma IV/5 for which Hindalco Industries Limited quoted Rs 3,502 a tonne. The increase in cost of coal for this category, however, would be passed on to the end product.